France's 10-year yield closed above 5% today. That's 1.6 percentage points more than Germany pays, up from 1.5 yesterday.
That spread is widening, lenders are demanding more to lend to France, because the risk is rising: a budget deficit above 5% of its economy, civil unrest, and a credit rating review on Friday.
The U.S. 10-year sits at 5.12%. AI builders are competing with the Treasury for money, because they expect big returns.
So, in France a 5% yield is pricing risk.
In the U.S., it's pricing demand.
On the latter, Meta reported after the close today, and showed us what that competition for capital looks like.
Revenue grew 26% to $64.6 billion. Their revenue guide for next quarter is $74.5 billion (midpoint). That's an expectation of 15% growth in just one quarter.
Demand isn't the problem. Fulfilling demand is the problem.
That's why Meta spent almost $34 billion on data centers and chips last quarter. It ate up all of the free cash flow.
So, as with Google earlier this year, Meta too has now swung to negative free cash flow.
And they're now looking to raise more money (via a potential stock issuance), to fund more computing capacity.
Why? Because they believe the returns on capital will far outweigh the cost of capital.
That's the story in this capex explosion that continues to grow.
Same 5% on both sides of the Atlantic. In France, lenders want to be paid for the risk. In America, borrowers are paying up for the opportunity.
The question is, given the demand-driven rise in the global cost of capital, is France being appropriately priced at 5%? Its risk premium should probably be far higher — far in excess of a U.S. Treasury.
